In the past week, selling pressure on Bitcoin from mining
companies that process payments in the digital currency has
accelerated, prompting more rounds of selling and falling
prices. The onslaught pushed the CoinDesk Bitcoin Price Index
as low as $173 on January 14 the first time it traded
below $200 since November 2013 before rebounding higher
The challenge faced by mining companies is that while they
are paid in Bitcoins, their operational costs are paid in hard
currencies and maintenance costs have been rising as the
difficulty of mining new Bitcoins increases. As prices have
declined, the payments processors earn less, yet still have to
pay out expenses in hard currencies with Bitcoins that are
worth less. Weve seen a lot of these guys folding
basically in the last few weeks because its not even
worth it for them to power the equipment to do the
payments processing, says Greg Schvey, partner at TradeBlock, a
New Yorkbased Bitcoin trading data center.
Mining processor troubles hit the headlines January 12 when
London-based Bitcoin mining service company CEX.io temporarily
halted operations because they had become unprofitable.
Suspension of CEX.io cloud mining service is only a
forced temporary measure, the result of cloud mining costs
exceeding mining profit, stated Jeffrey Smith, chief
information officer, in a
blog post to follow on a
Tweet in which he made the initial announcement. CEX.io is
looking for lower cloud mining and maintenance costs based or
higher Bitcoin prices to allow it to resume operations. Smith
told CoinDesk that Bitcoin prices would need to rise to $320
for the company to resume operations, absent any cost savings
The next day, CoinTerra of Austin, Texas, reported it has
been forced to default on $4.25 million of secured notes after
being shut out of its data center where the firm ran its
mining operation. CoinTerras service provider, C7 Data
Centers of Bluffdale, Utah, has sued it for nonpayment of fees.
Who would predict the downfall that Bitcoin has taken, in
terms of price and difficulty and all that? CoinTerra CEO
Ravi Iyengar told CoinDesk January 15. A lot of things
have happened that were not foreseen. Iyengar told
CoinDesk its next step would depend on how C7 proceeds.
By any measure, Bitcoin is a volatile and inefficient market
in which spot prices in hard currencies on exchanges, most of
which are outside the U.S., can gyrate wildly in a single day
and are vulnerable to disruptions in exchange operations and
potential hacking of stored digital currencies. For example, on
January 5, Sloveniabased Bitstamp exchange, a leading
trader in Bitcoin and U.S. dollars, discontinued service after
a hack of some of its wallets, raising worries of another
repeat of the collapse of the
Mt. Gox exchange in Tokyo a year earlier. Bitstamp restored
trading on January 9.
Since the CoinDesk Bitcoin Price Index skyrocketed to a high
of $1,147.25 on December 4, 2013, market gyrations have
continued even as more venture capital and new start-ups
expanded the reach of Bitcoin and the scope of its
ecosystem, as its advocates call it. In 2014 prices
rode a roller coaster in the first half of the year, then began
a bumpy decline in the second half, falling from $665.73 on
June 3 to $319.70 on December 31, 2014.
On January 14 the dollar price of Bitcoin plunged 21.9
percent (from $226.98) to end the day at $177.28, then
recovered 18.7 percent to $210.46 at the end of the January 15.
Given that Bitcoin is traded around the clock, seven days a
week, the Bitcoin market close is determined as the last trade
just before midnight UTC, also known as Greenwich Mean
Bitcoin veterans are undeterred by the recent volatility.
Ive been involved in the Bitcoin space since 2011
and Ive witnessed several different periods where
theres market movement and then new equilibrium levels
are set, [and the current turmoil] is no different from what
Ive tended to see over the last couple of years,
says Paul Chou, co-founder and CEO of LedgerX, a Bitcoin
trading company that has applied for approval from the
Commodities Futures Trading Commission to operate as a
derivatives exchange and clearinghouse.
Schvey at TradeBlock says the current shakeout in payment
processors will lead to a new equilibrium. What happens
is at a certain point miners are paid out by the network in an
amount proportional to the computational power they
deliver, he says. So people with higher operational
costs are pulling out of the market. That, in turn, will
reduce the competitive pressure on surviving mining companies,
which means that those other people will reach
profitability faster, will earn more Bitcoins for the some
amount of computing power, which also means they will have less
incentive to go out and dump [coins] in the market, he
explains. Even if Bitcoins are worth less, by reducing
operating costs, the surviving payment processors will
have less incentive to sell, he explains.
Some market participants question the claim that selling by
miners has driven down the price of Bitcoin. Its
just an assumption people are making, says a trader who
does proprietary trades for institutional investors. It
could be true, but where is the evidence? he asks. The
trader says it is more likely that the temporary suspension of
trading at Bitstamp early in January is the larger factor that
has spooked the markets the same way the collapse of Mt. Gox
did a year ago.
Regardless of the cause, selling pressures can be mitigated
if more investors come into the Bitcoin market. A
U.S.-regulated derivatives market could bring in those needed
investors, according to Chou at LedgerX. With a functioning
derivatives market, payments processors could enter contracts
to protect downside losses and avoid the prospect of having to
dump Bitcoins in times of market stress, he explains.
Historically in other asset classes, not only Bitcoin,
as people jump on and board and start to use derivative
instruments to monetize that volatility, what we tend to see is
that naturally the underlying spot and asset class volatility
goes down, Chou says. I expect to see the same
thing in the Bitcoin ecosystem as well.
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